Tanzania hasn’t been a choice destination for mining investors lately. More than a year on from the country’s ban on exporting gold concentrate, former FTSE 250 constituent Acacia Mining is still reeling. The blocked sale of diamonds from Petra Diamonds’ Williamson mine may have ultimately tipped the indebted group into a rights issue. Both companies’ cash flows have also been hampered by stalled VAT refunds and higher royalty costs. Those burdens are shared by junior miner Shanta Gold (SHG), but Shanta has used the crisis to hammer down run-of-mine costs, just as it completes an expensive switch to underground operations. Aided by good government relations, a great operating margin and an excellent mining asset in New Luika, we think Shanta’s value remains obscured by a pile of debt – which, actually, is manageable – and others’ woes.
Overhaul of operation
Generating free cash flow
Good relations with Tanzania's government
Single project risk
Debt repayments due
That’s not to argue that its enterprise value should sit on a top-of-the-sector average of five times cash profits. As its volatile two-year share price trajectory shows, Shanta isn’t a company to bet your life savings on. Nonetheless, prospective investors can take some assurance that chief executive Eric Zurrin and the board have done something like that, by electing to receive the bulk of their pay in stock.
Adding to the top-down overhaul of the business, expensive expat contractors have gone and the workforce is now almost entirely Tanzanian. Such measures have helped relations with a populist government, which bumped up its take (via a new clearing fee and an enhanced royalty) from 4 to 7 per cent last year. For proof that those relations are strong, Shanta can point to last November’s receipt of a $3.4m VAT refund. Detractors will point out that $16.2m of VAT receivables still dragged on the company’s working capital at the end of March, but that rebate was the largest received by any miner from the government.
Other costs have been pared back through a business-wide savings programme. By January, a shake-up of contractors had led to annualised savings of $5m, a figure that should tick up to $7m by the third quarter of 2018. That’s impressive, given combined operational and general and administrative costs came in at $73m last year.
Now, as the upfront capital costs required to transition to underground mining at New Luika unwind, all-in sustaining costs are expected to drop to between $680 and $730 an ounce in 2018, putting it up there with the world’s lowest-cost gold mines. True, Shanta will need every cent. After the abandonment of a new $50m debt facility with Investec, the company is on the hook for $15.7m of debt repayments this year. Assuming nothing more from the VAT receivables, Shanta should be able to clear this from existing cash and from free cash flow, which stockbroker Numis expects will hit $21m this year, and double in 2019; those forecasts assume a gold price of $1,307 and $1,350 an ounce, respectively.
| SHANTA GOLD (SHG) | ||||
| ORD PRICE: | 6p | MARKET VALUE: | £46.3m | |
| TOUCH: | 5.6-6p | 12-MONTH HIGH: | 8.3p | LOW: 2.6p |
| FORWARD DIVIDEND YIELD: | nil | FORWARD PE RATIO: | 3 | |
| NET ASSET VALUE: | 9.4p† | NET DEBT: | 48% | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
| 2016 | 107 | -4.3 | -1.5 | nil |
| 2017 | 103 | 3.6 | 0.6 | nil |
| 2018* | 108 | 20 | 1.8 | nil |
| 2019* | 126 | 31 | 2.8 | nil |
| % change | +17 | +55 | +57 | - |
| Normal market size: | 50,000 | |||
| Market makers: | 8 | |||
| Beta: | 0.85 | |||
| *Numis forecasts, adjusted PTP and EPS. †Includes intangible assets of $23.3m, or 2.3p a share. £1=$1.34 | ||||
